The following comes from the latest PIRC Alert, issued by PIRC, a firm of investment advisers. I strongly suspect it reflects the views of my friend Tim Bush and because of its significance I reproduce it in full:
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean–neither more nor less.”
Debate about the lawfulness of banks' defective accounts and the true and fair view requirement of the law, rumbles on. This has been heightened following the recent Bompas QC Opinion stating that there are significant problems with international accounting standards.
The core issue at stake is whether accountants should do what Parliament has intended them to do, or whether they have, literally, made up a set of rules to suit themselves? The question then arises, how could standard setters, auditors and the FRC get it wrong? What is the “true and fair view”, the basic legal test that accounts must reach, actually for?
PIRC has compared what earlier key legal opinions that the FRC obtained in 1983, 1984 and 1993 actually say with an academic paper from 1993 by PwC professor of accounting at Royal Holloway College, Christopher Nobes FCCA, purporting to cite those opinions1, and a 1993 Financial Times article citing David Tweedie CA (then at the FRC, and a former academic) that does likewise. Remarkably there is a fundamental mismatch between what the law actually is and what Tweedie and Nobes said it was. Nobes is explicit that what true and fair view means (“signifies”) changes according to accounting practice, i.e. it is a dynamic concept with changeable meaning.
However the 1983, 1984 and 1993 opinions clearly state that true and fair view is fixed in meaning, for compliance with the Companies Act (which includes directors' solvency duties). Given that function, the content of accounts to attain that standard can change in a dynamic way over time, but the meaning is anchored by the law.
The Nobes/Tweedie interpretation creates quite simply a Trojan Horse. After the 1993 publications large swathes of the accounting profession ran with the line that the meaning of true and fair view can also change according to what accountants wish it to mean. However for the sake of doubt, another Opinion from 2001 says exactly the same as the 1983, 84 and 93 Opinions. The law had not changed by what Tweedie and Nobes said, and has still not changed. True and fair view is a dynamic concept that means the same it has since 1947: it is the test to comply with company law, which above all is a solvency act.
That misunderstanding appeared to have whipped control of the public policy agenda from Parliament and the judiciary to accountants, an incongruity when the whole reason for Parliament legislating in the first place was due to accountants getting things wrong so often. This has occurred again with catastrophic results in particular banks by the accountants literally circumventing the law for expediency. PIRC is surmising that the 4 months of silence by the FRC on the subject is because the FRC knows Bompas is correct. The accountants have not changed the law, the law is the same it always has.
[1] Opinion of Hoffman and Arden QCs for the FRC- ASB 1993
Now let's consider that just for a moment.
First, if accountants had not been so flexible we would not have had a banking crash, I am sure.
Second, we would not have the farce that an audit now means the boxes have been ticked, not that the accounts are true and fair - as I have long argued.
Third, we may well not have had some law changes reducing disclosure for small business that compromise solvency for others.
Fourth, we may have had country-by-country reporting as solvency risk is local.
I believe PIRC are right on this issue: it's time for the profession to say where it is.
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I always like to ask who funds the agency behind the press release \ comment.
Who pays for the lights to be kept on at the PIRC?
Pension funds in the main
Pension funds being the main investors in UK plc! So you would think they should have a vested in interest in auditors doing things ‘right’.
I have to say I always struggled a bit with the concept of ‘true and fair’ and what that actually meant. But in the end I took it to mean that the accounts, and the numbers in particular, reflected what the company’s actual Profit was and what its balance sheet should actually look like. It didn’t mean the numbers had to be 100% accurate, but that they had to be close enough as made no odds.
I can accept the dynamic concept in one way only. Accounting standards are dynamic and so the way numbers/accounts are presented is also dynamic – e.g. we are moving from an old UK GAAP to IFRS gradually. So clearly the presentation will change and numbers may change if a different accounting standard is applied. But I don’t think that means that the concept of truth and fairness has changed, to my mind it means you’re applying truth and fairness to a different set of criteria/accounting standards.
Whether you accept the criteria/accounting standards make sense is another matter and you have posted quite a bit already, I think, about your thoughts on IFRS!
True and fair is a legal concept
That many accountants do not get that is the whole problem that PIRC are pointing out
You clearly don’t
The problem is what is meant by ‘true’ and ‘fair’ is unclear and never can be. Both are concepts with imprecise meanings … philosohpical concepts.
Both are matters of judgement and bear in mind that truth is in the eye of the beholder and fairness likewise.
If you have a law that uses imprecise concepts and relies on an individuals perception of what that concept means, you’re not going to get precise and consistent results. I always felt the law was at fault on this point. And I totally forget why ‘true and fair’ was used as opposed to some other form of words – I suspect at the end of the day it was a weasely get out for auditors if anyone complained the numbers weren’t 100% correct.
Do I get it what ‘true and fair’ means? Well as I pointed out yes I do but the point I was making was it’s not and never will be wholly clear due to the nature of the words themselves.
But I’m a simple person – Either the numbers are right or they’re not, and that’s what I always come back to … And that’s also why I’m not an auditor … I was always to precise … not good for the budget!
It’s ultimately about solvency – and that is the point you and the profession are missing
Completely
There is a back stop which means it is not arbitrary but decidedly firm
Also I am not sure why you say I donlt get it. If I look at some statements of what ‘true and fair’ means then a good example is:
“Although the expression of true and fair view is not strictly defined in the accounting literature, we may derive the following general conclusions as to its meaning:
True suggests that the financial statements are factually correct and have been prepared according to applicable reporting framework such as the IFRS and they do not contain any material misstatements that may mislead the users. Misstatements may result from material errors or omissions of transactions & balances in the financial statements.
Fair implies that the financial statements present the information faithfully without any element of bias and they reflect the economic substance of transactions rather than just their legal form”
I think that’s what I said albeit in a rather shortened/paraphrased form.
But I have a feeling that if the issue is on solvency, it’s not so much about the auditors opinion about the truth and fairness of the accounts according to the accounting standards that they’re based on, it’s about whether the accounting standards on which that opinion is based, are fit for purpose?
But even as I write that I can accept that if the accounts under the accounting standards show the company is solvent, if applying some basic common sense you can see the company has problems, you ought as an auditor have an obligation to comment on that fact. Maybe they always have had that obligation, but then so should management have that obligation.
If you go back a long way, there was a simliar issue with Rolls Royce (aero engines not cars) where they had capitalised a lot of R&D so the accounts showed they were solvent – which under GAAP at teh time was acceptable. But clearly they weren’t solvent and went bust/had to be bailed out. Same sort of issue I am thinking?
The PSG has had several dealings with the ICAEW – including going to “arbitration” which was about the only faintly amusing part of a depressing process.
Eventually the ICAEW “ruled” that an auditor’s responsibility extended only to examining the validity of the “accounts” submitted by a company and should this scrutiny result in the discovery or suspicion of misconduct or felony not directly related to the audit it was outside the remit and obligation of the auditor to report this to another authority.
The ICAEW are the lapdogs of the Big4 – and a dangerous breed.
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